The Perfect Founding Team

Andrew
Andrew

Building a successful startup is no easy feat. There are so many factors that need to come together in order to create a product that people love and a business that is profitable. The founding team is one of the most critical factors in a startup’s success. A great founding team makes the difference between a startup being an idea and becoming a reality.

In many startups, however, building a strong founding team and establishing a strong organizational culture are not the highest priorities. Immediate concerns and issues always seem to be more important. When the startup is in its very early stages, some might think it is not worth considering the question of human resources. Research suggests, however, that founders can avoid quite a few pitfalls by simply being aware of them. Researchers James N. Baron and Michael T. Hannan from the Stanford Project on Emerging Companies write, “though some observers might think that most start-ups look pretty much the same, or that the appropriate organizational design and culture for a high-tech venture is “obvious,” the data suggest otherwise.”

 

How does a great founding team come together?

Establishing the right founding team can be challenging. Occasionally, even the best professionals are unable to deliver a quality product and build a viable business. Sometimes, though, a group of enthusiastic, non-professionals can change the world. What’s the secret to making the perfect founding team?

 

Finding the Best “Founding Blueprints”

As a startup founder, would you select your co-founders based on their technical expertise to build the product you want? Do you seek out the brightest, most talented people you can find? Is it important for co-founders to have the right professional qualifications? Or does it not matter if they are qualified, as long as they follow instructions and do their job?

In the 1990s, sociologists James Baron and Michael Hannan conducted a comprehensive analysis of the founding cultures of two hundred startups. They focused on Silicon Valley ventures founded right before the tech bubble burst of 2000. In their study, they identified five distinctive organizational models; five very different approaches to hiring people, and defining organizational culture.

 

 

These five models are:

 

1. The Engineering Model

“We were very committed. It was a skunk-works mentality and the binding energy was very high.”

People join the company because of the challenging nature of the work. They work independently, taking personal responsibility for their work. There is no top-down control, but rather a productive peer pressure. Companies built on the engineering model are typically composed of hard-working, self-organizing “techies”.

 

2. The Star Model

“We recruit only top talent, pay them top wages, and give them the resources and autonomy they need to do their job.”

Startups founded on star models are devoted to hiring the best and brightest talent. Staffing decisions are made on the basis of long-term potential. Since it is very challenging to hire and retain the best talent consistently, these firms usually have scalability issues.

 

3. The Commitment Model

“I wanted to build the kind of company where people would only leave when they retire.”

Startups that use the commitment model hire people based on their cultural fit. The members of the organization feel a strong sense of belonging, and emotional or familial ties. The priority of human resources management is fostering a strong culture and ensuring that new hires fit that culture.

 

4. Bureaucracy Model

“We make sure things are documented, have job descriptions for people, project descriptions, and pretty rigorous project management techniques.”

Formalized control is the hallmark of organizations based on the bureaucracy model. Employees are usually organized into a clear hierarchy under top-down management. Typically, these firms hire individuals depending on their qualifications for a role.

 

5. Autocracy Model

“You work, you get paid.”

Most employees join for monetary reasons. Typically, they are usually micromanagement (coordination through close personal oversight) and hired to perform predefined tasks.

 

What the Data Suggests

According to the researchers, a startup’s founding model has a powerful and lasting effect on how their companies evolve and perform over time.

Among all the organizational blueprints that exist, one stands out as being exceptional. The data suggest that firms founded on the commitment model consistently outperformed firms with other founding models. These companies have the strongest chance of survival. Additionally, firms with this model are more than three times more likely to achieve an initial public offering (IPO).

 

Experience Matters

Cash is the lifeblood of startups. Raising capital is one of the most crucial capabilities of the founding team as it keeps the flywheel running. The research suggests, however, that capital is easier to raise for experienced and proven entrepreneurs than for people just starting out. The best candidates often have a high level of education, sound educational background, prior work experience and entrepreneurial skills, as well as international business experience.

In their study, Alberto Onetti et. al. examined 107 innovative Italian startups and their 254 founders. Their analysis distinguished three different groups of entrepreneurs:

  1. Techno entrepreneurs
  2. Employees turned entrepreneurs
  3. Proven entrepreneurs

 

A proven entrepreneur has a greater chance of raising enough capital to grow a business into a scalable startup that is profitable.

Researchers write:

“Some specific traits of the entrepreneurial profile of the new venture (mainly the educational background and previous experience), may have an initial imprinting effect on its firm profile and, hence, its likelihood to grow and be successful. (…) Work and international experience appear to be crucial success factors for startups at the very early stage. These characteristics prove to be strong enablers of fundraising, which happens to be vital at this particular time.”

The result of a comprehensive analysis (Furlan, 2019), examining 3,456 Italian new ventures in 20 industries indicates that indeed, founders’ pre‐entry experience indeed can have a great effect on the firm’s growth potential. Having previous industry-specific experience and entrepreneurial experience can be the most valuable assets for a newly-founded venture. They write: “We find that the presence of industry‐specific experience and entrepreneurial experience have a positive effect on startup size while generic experience does not exert any effect on startup size.”

 

Knowledge and Skills

A study by Muñoz-Bullon et al. indicates that the expertise, knowledge, and skills a founding team brings to the table correlate directly with the startup’s chances for success. According to the authors: “The likelihood of nascent entrepreneurs making the transition from a new venture idea to a profitable business is argued to be contingent on the breadth of the resources available within the startup team.”

As a first point, founders’ diverse experience should foster startup survival since the combination of different experience-based knowledge components leads to innovation. Secondly, founders share their experiences with each other, which helps to transfer valuable routines and industry expertise. By doing so, startups should improve their chances of survival.

Consequently, founders need to have a wide variety of experience and a great deal of knowledge in a variety of areas. In addition, they need to be able to communicate effectively and share their knowledge within the team. According to the authors, both conditions are necessary for startup success.

 

Breadth of knowledge and the T-shaped person

The notion of a T-shaped person was first popularized by Tim Brown, CEO of IDEO design consultancy. Eventually, it became synonymous with the new gold standard in navigating an increasingly complex world. The T-shaped person is someone with deep expertise in a particular area and a broad understanding of many related concepts.

If you visualize this concept as a graph, then the vertical axis represents the depth of expertise and the horizontal axis represents the breadth of knowledge across disciplines.

In contrast, I-shaped people are specialists. Generally, their expertise is limited to a narrow area of knowledge; they are most familiar with a single domain. They can understand a concept six levels deep. On the other hand, they don’t appear to be particularly open to ideas outside their narrow range of expertise.

T-shaped people are generalists. Although they are experts in one area, they are not as accomplished as specialists in that field. These individuals have a broad range of interests and are knowledgeable about concepts in a variety of fields. Their ability to integrate between disciplines acts as a bridge between isolated fields of knowledge.

 

 

 

A Few Common Characteristics of Highly Effective Groups

Experience and a variety of knowledge are important. However, having the right experience, expertise, and skills is not enough. Founders also need to put them to use. To get their startup off the ground, they must mobilize all of their material and intellectual resources. In an effective organization, the whole is greater than the parts. A great founding team is no exception.

In the words of researchers Honoré et al., “(…) startups are less likely to fail when their founding teams combine within-founder experience variety and across-team shared experience”.

Professor Alex (Sandy) Pentland, who runs the MIT Human Dynamics Lab, has devoted his life to understanding how highly effective groups function. He observed the communication patterns of over 2500 people for more than seven years and found a similar pattern of interaction in highly successful groups. He summarizes his key findings as follows:

“The data also reveal, at a higher level, that successful teams share several defining characteristics:

  1. Everyone on the team talks and listens in roughly equal measure, keeping contributions short and sweet.
  2. Members face one another, and their conversations and gestures are energetic.
  3. Members connect directly with one another—not just with the team leader.
  4. Members carry on back-channel or side conversations within the team.
  5. Members periodically break, go exploring outside the team, and bring information back.”

 

Furthermore, Prof. Pentland writes:

“The data also establish another surprising fact: Individual reasoning and talent contribute far less to team success than one might expect. The best way to build a great team is not to select individuals for their smarts or accomplishments but to learn how they communicate and to shape and guide the team so that it follows successful communication patterns.”

 

Having the Right Attitude

Founders of startups need a very different set of skills and mindset than corporate employees, according to Steve Blank. Like different spices, each follows its own rules. The characteristics they possess set them apart from other segments of the population. Skills and traits they possess include:

  • First and foremost, they should be passionate about the work they are doing. Blank writes: “A startup without driven, passionate people is dead the day it opens its doors.”
  • Having the ability to handle chaos and change; working in risky and unpredictable situations without a roadmap.
  • They are open to productive failure as long as it results in learning.
  • Openness to learning and discovery. Being highly curious, inquisitive, and creative. (Psychology might call this “openness”).
  • Ability to wear multiple hats at once, not being fixated on job titles and corporate functions.

 

 

A Final Caveat: Not Just the Founding Team is the Only Factor That Matters

In our quest to build the perfect founding team, we often overlook the viability of the business as a whole. We should keep in mind, however, that business experts and investors often overestimate the importance of management when evaluating the likelihood of building a great company. This phenomenon is well illustrated in the following quote from Venture Capital Handbook (Gladstone and Gladstone, 2002): “You can have a good idea and poor management and lose every time. You can have a poor idea and good management and win every time” (pp. 91–92).

Three researchers, however, were not completely satisfied with this common wisdom. They wanted to examine this question further. In their research, they followed the journey of 50 venture capital (VC) backed businesses from early business idea to initial public offering (IPO). They examined the question of whether investors should bet on the jockey or the horse; in other words, whether the business idea or the team that makes it happen is a better predictor of success.

The key findings of their study are as follows:

  1. “While the firms grow dramatically, their core businesses or business ideas appear remarkably stable.” This means that firms rarely change their core line of business, build a fundamentally different product or service or completely abandon their initial business idea. “This suggests that the firms’ business idea or line of business is fixed or elemental at an early stage in a firm’s life. (…) firms that go public rarely change or make a huge leap from their initial business idea or line of business.”
  2. “At the same time, firms commonly replace their initial managers with new ones and see their founders depart, yet still are able to go public, suggesting that VCs are regularly able to find management replacements or improvements for good businesses.”
  3. Moreover, it is crucial to get the vision and the main direction right before worrying about the team members.

There are varying perspectives on this issue in the literature. A number of scholars argue that the success of a startup depends on a strong and consistent founding team. Some scholars believe the opposite is true. Using startup data from 1995 to 2016, researchers (Ewens et al) suggest that venture capitalists (VCs) can actually improve the performance of their portfolio companies by replacing founders.

We do not intend to take a position on this issue in this article. Essentially, we are drawing attention to the fact that a startup’s founding team is only one factor out of many that determines whether the venture succeeds or fails. We need to have a holistic view of our venture, making sure we can turn our business model into a profitable company.

 

A Few Key Takeaways

  • When searching for co-founders, find people you feel comfortable working with. Consider cultural fit before anything else when hiring early employees.
  • Put people first and try to create a culture where they trust each other and feel like they belong to something greater than themselves.
  • Cash is the lifeblood of startups. In many cases, the ability to raise capital determines whether or not the firm will survive. Entrepreneurs with experience and proven track records have an easier time raising capital.
  • Instead of looking for experts, look for integrators. Those who are familiar with a wide range of concepts are better at connecting knowledge. This skill is crucial in a startup environment that is chaotic and unpredictable.
  • Talent is less important than you might think. Make sure to hire good team players. In a fast-changing environment, communication skills and cooperation are often more valuable than technical skills.
  • “A startup without driven, passionate people is dead the day it opens its doors.”—Steve Blank. Look for passionate individuals who can overcome obstacles and bounce back after major setbacks. An effective candidate is able to handle change, chaos, and uncertainty. They are comfortable with failure if it leads to learning.
  • Last, but not least you shouldn’t rely solely on the skills of the founding team to ensure success. Make sure your business idea is worth pursuing, your business model is a scalable one that you can turn into a profitable business. Although you may have the very best people on Earth, you may still struggle to achieve results.

References

Founding blueprints

  • Baron, James N., and Michael T. Hannan. “Organizational blueprints for success in high-tech start-ups: Lessons from the Stanford project on emerging companies.” California Management Review 44.3 (2002): 8-36.
  • Original study here
  • gsb.stanford.edu
  • sloanreview.mit.edu

 

Founding team experience

  • Onetti, Alberto, Federica Pepponi, and Alessia Pisoni. “How the founding team impacts the growth process of early stage innovative startups.” Sinergie Italian Journal of Management 33.May-Aug (2015): 37-53. Link here
  • Hashai, Niron, and Shaker Zahra. “Founder team prior work experience: An asset or a liability for startup growth?.” Strategic Entrepreneurship Journal 16.1 (2022): 155-184.
  • Furlan, Andrea. “Startup size and pre‐entry experience: New evidence from Italian new manufacturing ventures.” Journal of Small Business Management 57.2 (2019): 679-692. Link here

 

T-shaped skills

  • Heinemann, Elizabeth. “Educating T-shaped professionals.” AMCIS 2009 Proceedings (2009): 693. Link here
  • Hamdi, Shabnam, et al. “Impact of T-shaped skill and top management support on innovation speed; the moderating role of technology uncertainty.” Cogent Business & Management  3.1 (2016): 1153768. Link here
  • Epstein, David, and Epstein, David. Range: How Generalists Triumph in a Specialized World. United Kingdom, Pan Macmillan, 2019.
  • jchyip.medium.com

 

Team dynamics

 

On Passion

  • steveblank.com
  • Dorf, Bob, et al. The Startup Owner’s Manual: The Step-By-Step Guide for Building a Great Company. United Kingdom, Wiley, 2020.

 

Business as a whole

  • Kaplan, Steven N., Berk A. Sensoy, and Per Strömberg. “Should investors bet on the jockey or the horse? Evidence from the evolution of firms from early business plans to public companies.” The Journal of Finance 64.1 (2009): 75-115.
  • Ewens, Michael, and Matt Marx. “Founder replacement and startup performance.” The Review of Financial Studies 31.4 (2018): 1532-1565.